HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

REGINA

v.

DIMSEY

(APPELLANT)

(ON APPEAL FROM THE COURT OF APPEAL (CRIMINAL DIVISION))

ON 11 OCTOBER 2001

[2001] UKHL 46

LORD BINGHAM OF CORNHILL

My Lords,

1. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Scott of Foscote. For the reasons he gives I would answer the certified question as he proposes and dismiss the appeal.

LORD NICHOLLS OF BIRKENHEAD

My Lords,

2. I have had the advantage of reading in draft the speech of my noble and learned friend Lord Scott of Foscote. For the reasons he gives I too would dismiss this appeal.

LORD STEYN

My Lords,

3. I have read the opinion of my noble and learned friend Lord Scott of Foscote. For the reason he gives I would also dismiss the appeal.

LORD HUTTON

My Lords,

4. I have had the benefit of reading in draft the speech of my noble and learned friend Lord Scott of Foscote with which I am in full agreement. For the reasons he gives I too would dismiss this appeal.

LORD SCOTT OF FOSCOTE

My Lords,

5. Section 18 of the Finance Act 1936 (26 Geo 5 + 1 Edw 8, c 34) enacted important and far-reaching provisions designed to counter tax avoidance by the transfer of assets abroad. Various amendments and additions to the original provisions have been made since then but the broad scheme established in 1936 remains in force. The current provisions are to be found in sections 739 to 746 of the Income and Corporation Taxes Act 1988.

6. Subsection (1) of section 739, which in section 18 of the 1936 Act took the form of a preamble, expresses the purpose of the statutory provisions:

"(1) The following provisions of this section shall have effect for the purpose of preventing the avoiding by individuals ordinarily resident in the United Kingdom of liability to income tax by means of transfer of assets by virtue or in consequence of which, either alone or in conjunction with associated operations, income becomes payable to persons resident or domiciled outside the United Kingdom."

Subsection (2) contains the principal provision whereby the tax avoidance consequences of the transfer abroad are sought to be negated:

"(2) Where by virtue or in consequence of any such transfer, either alone or in conjunction with associated

operations, such an individual has, within the meaning of this section, power to enjoy, whether forthwith or in the future, any income of a person resident or domiciled outside the United Kingdom which, if it were income of that individual received by him in the United Kingdom, would be chargeable to income tax by deduction or otherwise, that income shall, whether it would or would not have been chargeable to income tax apart from the provisions of this section, be deemed to be income of that individual for all purposes of the Income Tax Acts".

7. The potential breadth of this provision was cut back by the decision in your Lordships' House in Vestey v Inland Revenue Commissioners. It was held that the provision (then section 412 (1) of the Income Tax Act 1952) applied only to the individual or individuals who had sought to avoid tax by transferring assets abroad and did not apply to individuals simply because they might become the recipients of income or capital derived from those assets. A tax liability was later imposed by section 45 of the Finance Act 1981 (now section 740 of the 1988 Act) on the actual recipients of income or capital derived from the transferred assets.

8. My Lords, the issue on this appeal is a short one. It is whether section 739 (2), deeming the income of the foreign transferee to be the income of the tax avoider/transferor, impels the corollary that that income is for tax purposes to be deemed not to be the income of the foreign transferee.

9. This issue does not arise out of a dispute between the revenue and a foreign transferee as to the tax liability of the latter. This should not be thought surprising. Foreign transferees are in general chosen by tax avoiders for their invulnerability to tax demands by the revenue. They do not submit tax returns and then engage in disputations with the revenue as to the extent of their liability. This issue arises out of criminal proceedings taken against the tax avoider and his associates. I must explain how it comes about.

The Facts

10. The appellant, Dermot Jeremy Dimsey, is resident in Jersey. Via a Jersey company, DFM Consultants Ltd, the appellant provides financial services to clients. These services include setting up off-shore companies for persons resident in the United Kingdom and the administration of these companies. One of the appellant's clients was a Mr Chipping, a resident in the United Kingdom. Mr Chipping became involved as an intermediary in the supply of avionic equipment to South Africa. On Mr Chipping's instructions the appellant formed two off-shore companies, Thomlyn Supplies Ltd. ("Thomlyn") and Glenville Supplies Ltd ("Glenville") to deal with the South African contracts that Mr Chipping had obtained. Mr Chipping was the beneficial owner of the shares in and was in control of the two companies.

11. The South African contracts were signed by the appellant in Jersey on behalf of the companies. The profits made by Thomlyn were £664,057 and by Glenville were £582,000 (see the judgment of the Court of Appeal given by Laws LJ [2000] QB 744, 751. The appellant arranged for the issue of credit cards in the names of the two companies but for the personal use of Mr Chipping. He arranged for the payment by the companies of liabilities incurred through Mr Chipping's use of these cards for personal expenditure.

12. The appellant set up a third off-shore company, Lantau Investments Ltd. ('Lantau'), for Mr Chipping. Lantau was not a trading company but was used as a receptacle for some of the profits derived from the South African contracts. A flat in England for the use of a member of Mr Chipping's family was acquired by Lantau.

13. In September 1993 the revenue began an investigation into Mr Chipping's tax affairs. The appellant assisted Mr Chipping in providing false and misleading information to the revenue regarding the three off-shore companies, the South African contracts and certain bank accounts that Mr Chipping held in Jersey. A solicitor in England, Mr Da Costa, had been retained by Mr Chipping to act for him in the Inland revenue investigation. He, too, played a part in the provision of this false and misleading information.

14. In due course the revenue commenced criminal proceedings against Mr Chipping, Mr Da Costa and the appellant. There were eleven counts. All bar one, count 10, were counts under which Mr Chipping alone was accused of cheating the revenue. He pleaded guilty to counts 1 to 8, which related to undeclared taxable income for the years 1986/87 to 1993/4 and to income and benefits derived from Thomlyn, Glenville and Lantau. He was convicted at trial on the other two counts of cheating the public revenue. One of these counts related to £200,000 odd, which had been paid by Thomlyn and/or Glenville to Lantau as, in effect, nominee for Mr Chipping. The other count charged Mr Chipping with cheating the revenue of corporation tax by concealing the existence of profits made by the off-shore companies.

15. Count 10, the only count under which the appellant and Mr Da Costa were charged, alleged a conspiracy contrary to section 1(1) of the Criminal Law Act 1977. The alleged conspirators were Mr Chipping, Mr Da Costa and the appellant. The particulars were that the three accused:

"Between 1 January 1993 and 8 July 1994, conspired together, with intent to defraud and to the prejudice of Her Majesty the Queen and the Commissioners of Inland Revenue, to cheat Her Majesty the Queen and the Commissioners of Inland Revenue of public revenue by failing to make full and complete disclosure to the Commissioners of Inland Revenue of:

(i) [Mr Chipping's] worldwide assets and liabilities;

(ii) income and benefits which had derived from off-shore companies which he, [Mr Chipping], managed and controlled, namely [Glenville, Lantau, Thomlyn];

(iii) profits made by the said off-shore companies which he [Mr Chipping] managed and controlled;

(iv) interest received by [Mr Chipping] which was derived from bank accounts held at the Royal Trust Bank (Jersey) Ltd."

16. Particular (i) was deleted during the course of the trial. Particular (ii) related only to the sum of £200,000 odd that had been paid to Lantau and to the sums charged to the Thomlyn and Glenville credit cards. Particular (iv) related to interest on the Jersey bank accounts. The revenue have conceded that a conviction could not be upheld on the basis of particular (iv) alone.

17. Particular (iii) is, for present purposes, the most important. At the trial the revenue ran their case under particular (iii) on the footing that the conspirators had attempted to cheat the revenue of corporation tax due from the three off-shore companies. These companies, it was said, were liable to corporation tax because they were resident in the United Kingdom. They were resident in the United Kingdom because the management and control of their respective businesses took place in the United Kingdom. The profits of the three companies were, therefore, liable to attract corporation tax. There was no mention at the trial of section 739 of the 1988 Act. No one took the point that under section 739 the income of each of the three companies was deemed to be the income of Mr Chipping. This point only emerged in the Court of Appeal.

18. The jury convicted all three defendants on count 10. Mr Doyle, one of the junior counsel for the appellant, has pointed out that it is not possible to know which of the particulars constituted the basis on which the jury brought in their verdict of guilty. It may well have been particular (iii) alone. Accordingly, if a conviction based on particular (iii) cannot be upheld the conviction, he submits, is unsafe.

19. My Lords, this submission is, in my opinion, well-founded. Particular (i) has been withdrawn, particular (iv) cannot suffice on its own and particular (ii) concentrated on Mr Chipping's personal tax liability. The appellant's evidence was that he had had nothing to do with Mr Chipping's personal tax returns or tax liabilities and had advised Mr Chipping to obtain expert tax advice. It is quite possible that the jury accepted this evidence and convicted the appellant on the basis of particular (iii) alone. It must follow that if a conviction on the basis of particular (iii) cannot be upheld, the appellant's conviction cannot stand.

20. Mr Chipping, who had pleaded guilty to eight counts and had been convicted on all three counts, was sentenced to three years' imprisonment. He has not appealed. Mr Da Costa was sentenced to 12 months' imprisonment. He, too, has not appealed. The appellant was sentenced to 18 months' imprisonment. He alone has appealed. He had served the sentence before his appeal came to be heard in the Court of Appeal.

The Issues

21. Before the Court of Appeal and before this House the appellant's appeal has been based upon the proposition that the three off-shore companies were not in law liable to pay United Kingdom corporation tax on their profits. If the companies were not in law liable to pay corporation tax, there could be no such thing as an offence of cheating, or conspiring to cheat, the revenue of corporation tax payable by the companies. This must be right.

22. Mr Rook QC, counsel for the revenue, has pointed out that count 10 refers to "public revenue", not to "corporation tax". If the income of the companies is, under section 739, deemed to have been the income of Mr Chipping for income tax purposes, then the concealing of that income would be depriving the revenue of "public revenue", ie income tax payable by Mr Chipping, whether or not corporation tax was payable by the companies. Mr Rook's point is, in my opinion, correct but it cannot avail the revenue on this appeal. The prosecution was conducted at trial on the footing that corporation tax payable by the companies was the "public revenue" of which the three accused had conspired to cheat the revenue. The appellant, and presumably the other two accused, defended the case on the basis on which it was prosecuted. In bringing in a verdict of guilty the jury must have been satisfied that each of the accused had had the requisite mens rea in relation to a conspiracy to cheat the revenue of tax payable by the companies. If the revenue's case had been based on conspiracy to cheat the revenue of tax which, under section 739, was payable by Mr Chipping, the questions put to and evidence given by the appellant might have been different. The jury's view as to whether the appellant had the intention requisite for guilt might have been different. It is, in my opinion, too late for the prosecution to alter the basis of its case. It cannot now attempt to uphold the conviction on a basis not explored at trial. If it is right that, in law, the three off-shore companies were not liable to pay United Kingdom corporation tax, the appellant is, in my opinion, entitled to succeed in his appeal.

23. There were two grounds on which it was argued before the Court of Appeal that a conviction on the conspiracy count based on particular (iii) should be set aside.

24. It was argued, first, that the trial judge misdirected the jury as to the correct test for determining whether Thomlyn, Glenville and Lantau were resident in the United Kingdom. Residence in the United Kingdom was, of course, a necessary condition of their liability to corporation tax. In giving the judgment of the court Laws LJ set out the relevant passages from the judge's summing-up, summarised the law and concluded that there had been no misdirection.

25. The second ground was the section 739 point. As I have said, this point was raised for the first time before the Court of Appeal. This was not the revenue's fault. It was not until course of the trial that the revenue first became aware that Mr Chipping was the beneficial owner of the shares in the three off-shore companies and that section 739 might apply. That is why, at trial, the revenue concentrated, in regard to particular (iii), on the companies' liability to corporation tax. In the Court of Appeal the section 739 point was raised by counsel for the appellant, not by the revenue. It was submitted on behalf of the appellant that section 739(2) applied, with the result that the income of each of the off-shore companies was deemed for income tax purposes to be the income of Mr Chipping. So, it was submitted, it followed that the income must be deemed not to be the income of the companies. If that were right, then none of the companies could be liable to corporation tax in respect of that income. The revenue accepted that, having regard to the facts that had emerged at trial, section 739(2) did apply, but did not accept that the section required that the companies' income be deemed not to be theirs for tax purposes. The Court of Appeal agreed with the revenue and dismissed the appeal.

26. The Court of Appeal certified the section 739 point as a point of law of general public importance but refused leave to appeal. Leave to appeal to this House on the section 739 point was granted by an Appeal Committee. The appellant, at the commencement of the hearing of the appeal, sought leave to appeal also on the corporate residence point. Your Lordships declined, however, to entertain an appeal on this point. As is pointed out in the respondents' case, there was no dispute between the parties as to the correct test in law of corporate residence. The only question was whether that test had been accurately reflected in the judge's summing up. That issue had been fully considered in the Court of Appeal.

27. No mention had been made in the Court of Appeal of the European Convention for the Protection of Human Rights and Fundamental Freedoms. The hearing in the Court of Appeal took place in 1999 before the incorporation of the Convention into domestic law under the Human Rights Act 1998. The relevant sections of the Act came into effect on 2 October 2000. With the leave of the Appeal Committee, the appellant was permitted to base an argument on article 1 of Protocol No 1 to the Convention.

28. There are, therefore, two issues before your Lordships. The first is whether under section 739(2) of the 1988 Act the income of the three off-shore companies, which is deemed to be the income for income tax purposes of Mr Chipping, must also be deemed not to be the income of the companies. The second issue only arises if the companies' income, notwithstanding that under section 739(2) it is deemed to be the income of Mr Chipping for tax purposes, remains for tax purposes the income of the companies. The issue is whether this state of affairs is inconsistent with the right to property guaranteed by article 1 of Protocol No 1 to the Convention.

29. I should add that both in the Court of Appeal and before your Lordships' House the appellant's appeal has been heard together with an appeal brought by Brian Roger Allen, another of the appellant's clients. The section 739 point arises on both appeals. And Mr Allen, like the appellant, has raised before the House a Convention point, albeit a different Convention point from the appellant's Protocol No 1 point. I have had the advantage of reading in draft the opinion of my noble and learned friend Lord Hutton in Allen's case. The remarks about retrospectivity and R v Lambert [2001] 3 WLR 206 made by my noble and learned friend in paragraph 20 of his opinion apply also to the Convention point raised by the appellant. If the appellant's conviction was safe before the incorporation of the Convention into domestic law, it has not ceased to be safe because of that incorporation.

The section 739 issue

30. The thrust of the submission made by Mr Venables QC on behalf of the appellant is that the deeming provision in section 739(2) must be carried through to what he contends is its logical conclusion. He cites Peter Gibson LJ who in Marshall v Kerr (1993) 67 TC 56, 79 said:

"I take the correct approach in construing a deeming provision to be to give the words used their ordinary and natural meaning, consistent so far as possible with the policy of the Act and the purposes of the provisions so far as such policy and purposes can be ascertained; but if such construction would lead to injustice or absurdity, the application of the statutory fiction should be limited to the extent needed to avoid such injustice or absurdity, unless such application would clearly be within the purposes of the fiction. I further bear in mind that, because one must treat as real that which is only deemed to be so, one must treat as real the consequences and incidents inevitably flowing from or accompanying that deemed state of affairs, unless prohibited from doing so."

31. So, Mr Venables submits, one must treat as real the statutory deeming required by section 739(2). The income of the transferee is deemed to be that of the transferor. One must then treat as real the consequences and incidents flowing from or accompanying that deemed state of affairs. If the income were the income of the transferor it would not be the income of the transferee.

32. This approach to section 739(2) is, Mr Venables submits, fortified by a presumption against double taxation and a presumption that Parliament intends taxation according to law and not according to administrative fiat.

33. As to double taxation, if the revenue are right in their submissions on this appeal, then Mr Chipping is liable under section 739(2) to income tax on the companies' income and the companies are liable to corporation tax on the same income. In the course of the hearing before your Lordships Mr Milne QC, counsel for the revenue, gave an assurance on behalf of his clients that in seeking to recover income tax against a transferor under section 739(2) credit would always be given for any tax that had been paid on the same income by the transferee, and vice versa. But, as Lord Wilberforce remarked in Inland Revenue Commissioners v Garvin [1981] 1 WLR 793, 799, the avoidance of double taxation "should be a right and not merely a privilege".

34. As to taxation according to law and not according to administrative fiat, this House in Vestey v Inland Revenue Commissioners [1980] AC 1148 rejected the revenue's contentions that every beneficiary was taxable on the whole of the trust income regardless of whether he or she had received any, that "there is no duty upon the commissioners to collect the whole of this [tax] from any one beneficiary", and that "[the commissioners] are entitled, so long as they do not exceed the total, to collect from selected beneficiaries an amount decided upon by themselves." Lord Wilberforce said, at p 1173:

"I accept . . . . that they cannot, in the absence of clear power, tax any given income more than once. But all of this falls far short of saying that so long as they do not exceed a maximum they can decide that beneficiary A is to bear so much tax and no more, or that beneficiary B is to bear no tax."

35. However, the issue before your Lordships is one of construction of section 739(2). If the section on its true construction does leave the transferee liable to be taxed on its actual income notwithstanding that that income is the deemed income on which the transferor is liable to be taxed then, subject to the Human Rights Act point, that is that. The issue, of course, only arises in relation to income of a transferee on which the transferee is liable to pay United Kingdom tax. But on the premise that the three off-shore companies were resident in the United Kingdom at the material time, it is common ground that, leaving aside section 739(2), they would have been liable to pay corporation tax on their profits (see section 6 of the 1988 Act). And the income each company received in the tax year in question would have had to be brought into the computation of its taxable profits.

36. Section 739(2) is expressed to deem the transferee's income to be the income of the transferor "for all purposes of the Income Tax Acts". Section 831(1) of the 1988 Act has separate definitions of "the Corporation Tax Acts" and "the Income Tax Acts" and the Court of Appeal concluded, accepting a submission made by counsel on behalf of the revenue, that the deeming provision did not affect the liability to corporation tax of transferee companies: per Laws LJ [2000] QB 744, 764:

"In short (as was submitted by Mr Brennan, junior counsel for the Crown) the deeming provision does not affect corporation tax."

37. There is a possible implication in this language that in the view of the Court of Appeal the deeming provision would affect the income tax liability of a transferee who was not a company but an individual. Suppose the case of a transferee resident and domiciled abroad to whom assets have been transferred as part of a tax avoidance scheme and where the tax avoider has power to enjoy income of the transferee so as to attract section 739(2). For as long as the transferee remains non-resident the present problem does not arise. The transferee is not liable to pay United Kingdom tax on income generated abroad. But suppose, whether through inadvertence or by design, the transferee becomes resident in the United Kingdom. What would be the tax liability of the transferee in respect of the income which, under section 739(2), is deemed to be the income of the transferor "for all the purposes of the Income Tax Acts"? Is it the case that the transferee, if a company, would have to bring that income into its computation of profits for corporation tax purposes but if a non-corporate individual would not be liable to income tax in respect of that income?

38. I am unable to accept that a distinction between the position of a transferee company and a transferee who is an individual can accord with what Parliament intended. The contrary view requires that the deeming words in section 739(2) be read as follows:

"shall . . . . for all purposes of the Income Tax Acts be deemed to be the income of that individual and not the income of any other individual."

This wording would, I think, justify drawing a distinction between a transferee company and a transferee who is an individual.

39. By contrast, Mr Venables, for the appellant, would have the deeming words read:

"shall . . . . for all tax purposes be deemed to be the income of that individual and not the income of any other person."

This reading would prevent any distinction being drawn between the liability of a company transferee to corporation tax and the liability of an individual transferee to income tax.

40. Mr Milne, on the other hand, would simply leave the words as enacted and confine the deeming provision to its literal meaning. He would, that is to say, confine its effect to the transferor and decline to treat as real the consequences that would follow the deemed state of affairs if the deemed state of affairs were real (see Marshall v Kerr 67 TC 56, 79).

41. In my opinion, the legislative history of section 739 and the other provisions in Chapter III of Part XVII of the 1988 Act, the comparison of section 739(2) with other tax avoidance provisions and the tax avoidance purpose of section 739 all suggest that Mr Milne's approach is the right one.

The legislation

42. The original enactment was section 18 of the Finance Act 1936. Subsection (1) of section 18 was the ancestor of section 739(2). When the 1936 Act was enacted, and until 1965 when corporation tax was introduced, companies paid income tax not corporation tax. A distinction between company transferees and individual transferees based upon the reference to "the Income Tax Acts" would not have been possible under section 18, or, indeed, until 1965. The deeming provision would either have exonerated from liability to tax the income of all transferees or of no transferees.

43. By the time corporation tax was introduced, in 1965, section 18 of the 1936 Act had become section 412 of the Income Tax Act 1952 (15 + 16 Geo 6 + 1 Eliz 2, c 10). Companies were still liable to income tax on their income. There was still no distinction that could be drawn as to the effect of the deeming provision on the tax liability of company transferees compared with individual transferees.